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Friday, 29 July 2016

10 Ways to Fail At Stock Investing

Just because your broker tells you investing is simple (or maybe
you’ve seen those online ads promoting an easy solution in the form of their
investing courses…) doesn’t mean you can take it lightly. After all, you don’t
have unlimited lives to keep playing this Russian roulette.

This is a guest post contributed by Call Levels and edited by Budget Babe (my words in blue).

The
electronic environment in which we trade in these days remove a need to deal
with any human element. This means the way we receive data, make a decision and
execute a trade has, to a certain extent, become seemingly easier than it
really is.

Such a
mindset is dangerous. Making investment decisions in such an environment is
actually harder to do than one believes. Many people often find themselves
oscillating between states of fear
and greed – they become greedy when
they make money, and want to make as much as possible; when they lose money,
they panic and worry that they’ll lose it out.

“I will tell you how to be rich.
Be fearful when others are greedy. Be greedy when others are fearful.” – Warren
Buffett

Every investor worth his salt would probably be familiar with the
above quote by the most celebrated investor of our times, but of course,
executing such wisdom is a whole different ball game altogether.

Greed can
manifest in several ways. Putting all your money into one stock, for instance,
or buying irrationally. When this happens, you can bet that you’re likely
taking positions based on emotional guidance, and this usually leads to some
very poor decisions being made.

2. Thinking it is a game

“If investing is entertaining, if
you’re having fun, you’re probably not making any money. Good investing is
boring.” – George Soros

Thanks to
the proliferation of apps and games centred around investing, we’re now
becoming desensitized to the manner in which stock trading is performed. This
makes it feel like a game and can easily lead to over-trading. The truth is,
investment requires a great deal of research, strategizing, and hours spent
mulling over entry and exit plans. If you’re not sure,
here’s one way I do it.

3. Unwilling to take losses

“If you have trouble imagining a
20% loss in the stock market, you shouldn’t be in stocks.” – John (Jack) Bogle

My broker has an occupational hazard of showing off to me whenever
the stocks he recommends (and which I often don’t end up buying) have risen in
price whenever there is a (false?) rally or a bull market. But hey, almost
everyone makes money in these cases. More often than not, you should be selling
on these rallies instead of foolishly chasing them. I should know; I speak from
personal experience.

Stock prices move up and down. If you’re looking to park your money
in the stock market, thinking that you’ll sell off everything when you reach 65
and cash out the money for your golden retirement, I urge you to think again.
What if the year in which you retire is a recession year, where stock prices
have fallen to all-time lows? There is no certainty in the stock market –
that’s why all investment statements and prospectus always come with a
disclaimer about risks.

If you’re unwilling to stomach losses, perhaps you should be
looking at more stable (but often also lower-yielding) instruments such as
fixed deposits or bonds instead.

4. Getting married to a stock

“Know
what you own, and know why you own it.” – Peter Lynch

This is
the opposite from the above on being unwilling to take losses. In such a
situation, one has made good gains from a stock and then decides to marry it
and never sell. Whilst Warren Buffett has famously quoted that he would hold on
to stocks forever, few of us have this sort of holding power and it would make
more sense to cash out and redeploy the money to better-producing counters once
your stock has run its course.

I made 23% in capital gains on a counter within 2 months not too
long ago and cashed out on 75% of my holdings, thinking I would hold the rest
for the long-term as I thought well of the management and it had been rewarding for
me thus far. However, I eventually forced myself to sell the entire lot after
discovering a potential problem in the company which I had missed out
previously.

Not all winners remain winners forever.

5. Herdentality

“The time of maximum pessimism is
the best time to buy and the time of maximum optimism is the best time to
sell.” – John Templeton

We see
this in financial news all the time. Whenever a piece of news is announced, the
markets respond almost immediately. That is the herd moving, and the worst
thing you can do is to you’re your trades based on where they go. The problem
here is that the herd moves fast, and by the time news has hit, they’ve already
left. How fast can you react and catch up?

For instance, investors who had bought in during the Global
Financial Crisis are sitting on hefty gains right now. While some people are
flocking to REITs now in the midst of today’s (false?) rally, some of us
financial bloggers have taken the opportunity to cash out on our stocks,
including yours truly. Did you do the same, or have you already missed the boat?

6. Believing history will repeat
itself

“Markets
can remain irrational longer than you can remain solvent.” – John Maynard
Keynes

In every
trading account you set up or any investment-linked plan (ILP) you sign, you’re
almost always given the following disclaimer: “Past performance is not an
indicator of future results.” That being said, it is human nature to look for
patterns and precedences and hope they’ll happen again. How many unfortunate victims have seen this happen on their ILPs, which
they had mistakenly thought would be a safe instrument for their retirement?

7. Make decisions that are blind
to company performance

In the thick
of trading action, we sometimes forget that stock prices are ultimately just
numerical numbers rising and falling; are the end of the day, they reflect
companies run by real people selling real products and services. If we stress
ourselves through buying and selling by the minute on small profits, we
potentially lose out on the fat profits if we simply patiently waited for the
companies to grow.

8. Overestimating your own
knowledge

“I’m only rich because I know when
I’m wrong…I basically have survived by recognizing my mistakes.” – George Soros

Sometimes
when we makequick profits, we think it
is because of our awesomeness. Let’s take this one strategy for example: there
are some folks who believe that choosing stocks trading at 52-week lows is a smart
move.

These
people then scour the markets regularly to find such “cheap” stocks, with a
theory that since these stocks are already low, the next trajectory must be up.
The tragic fact is that the counter can slide further to hit new record lows.
Don’t believe me? Look at what happened with Noble (SGX: N21).

If a
strategy sounds too smart and easy to implement, it probably is. The smartest
thing you can do is to recognize the folly and move on.

9. Adopting a gambler’s attitude

The four most dangerous words in
investing are “This time it’s different” – John Templeton

Trying
something over and over again with the same facts / strategies and hoping that
things will be different this time? This often (subconsciously) leads us to
look for information which validates our decisions and choices, convincing
ourselves further that it will surely work this time.

“Hope” is a dangerous thing in investing.

10. Assume that trading can become
a day job

The most
dangerous illusion about modern electronic stock trading is that one is easily
led to believe this can provide a sustainable, daily income. A couple of hundred dollars from a small trade each day
resulting in over $4000 income a month sounds like a feasible business plan,
but it is not. What are the chances of you getting it 100% right all the time?
Even geniuses have gotten it wrong sometimes.

The stock
market is NOT your friend. It is not a friendly app that resides on your phone
giving you hours of entertainment and small profits by the side; it is an
international battlefield which attracts the sharpest minds on the planet as
well as herds of speculators with not a clue about what they’re doing.

It is
chaos.

For you
to successfully turn a good trade and see results from your investments, you
need to keep disciplined, trade with clarity and be armed for a wide variety of
scenarios to happen (Google “margin of safety” to learn a little more).

What's your mortgage like?

Hello!

You can call me Dawn, and this little space on the Internet is where I write about becoming financially-free. Join me as we learn more about savings, budgeting, paying off debts, insurance and investing together!

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Disclaimer

Please note that all statements published on this blog are solely opinions of my own i.e. of a personal nature, and should not in any way be taken as statements of fact. Readers are encouraged to do their own research before arriving at any conclusions based solely on materials provided, or republished, on this blog.